Chapter 3:
Action on Living Standards through Pay, Personal Taxation and Social Inclusion
3.1 - The Programme for National Recovery (PNR), Programme for Economic and Social Progress (PESP) and Programme for Competitiveness and Work (PCW) each provided for significant increases in real living standards. After tax pay increased by 23 per cent for single persons and by 17 per cent for married couples (with two children) over the period 1987 to 1996. During this time social welfare payment rates increased by 8 to 11 per cent in most cases, although the lowest payments were increased more rapidly, in some cases by up to 41 per cent to bring them into line with other Social Welfare payment rates.
3.2 - Looked at in terms of the European Union, Irish living standards have increased significantly since 1991. Ireland's GDP per capita in 1991 was estimated to be 75 per cent of the EU average. Estimates for 1995 show GDP per capita in Ireland at 89 per cent of the EU average.
3.3 - Continued significant growth in real living standards is a legitimate aspiration provided it is grounded in a shared understanding of how it can be consistent with national competitiveness and increased employment.
3.4 - This Partnership represents, in that sense, a shared understanding for improved living standards based on moderate pay increases, low inflation, significant personal taxation reform and reduction, as well as greater economic and social solidarity.
3.5 - On pay, the terms of the Draft Pay Agreement are detailed in the Appendix.
3.6 - On personal taxation the process of tax reform will be intensified over the years 1997 to 1999, with the Government pursuing the priorities set out in its policy agreement, A Government of Renewal. A sum of £1 billion, on a full year cost basis, will be made available for all tax measures covered by this Partnership.
3.7 - On Social Welfare, the changes are outlined in Chapter 4.
3.8 - The particular priorities that will be pursued are:
Personal Taxation
3.9 - The Government will introduce personal tax reductions to the cumulative value over the three years of £900 million on a full year cost basis. For those on the average industrial wage, receiving pay increases of 9 1/4 per cent, their after tax income will increase by up to 14 per cent.
3.10 - These reductions will take place in each of the years and will produce, after tax, a higher level of take home income, which is estimated to be close to 5 per cent.
3.11 - Action on personal taxation will be implemented in an integrated manner with measures to promote social inclusion, to ensure that potential distortion of the labour market is avoided, and the impact on work incentives is maintained, in the light of current and ongoing labour market conditions.
3.12 - The Social Partners confirm their acceptance of the principle of taxation of all income within the ordinary parameters of the tax system. A number of modifications have already been introduced to reduce the impact of taxation on income for certain Social Welfare benefits. The Government will introduce a further relief in respect of disability benefit in the 1997 Budget. The measures to give effect to this relief will be agreed in consultation with the Social Partners.
Atypical Workers
3.13 - The changing nature of work arrangements and the growing number of workers who may not work on a continuous basis or whose income may fluctuate significantly over the course of their employment have implications for the way in which such income can be fairly and efficiently taxed. The Social Partners have agreed that the appropriate taxation arrangements for atypical workers should be examined jointly in greater detail during the course of this Partnership to see how the income tax system might be adapted to cope with this change in the nature of employment and activity.
Tax Credits
3.14 - The Social Partners note the proposals put forward by several groups in the discussion on this Partnership for a change to tax credits and standard rating of personal allowances as a way of equalising the benefits of tax relief and allowances to taxpayers on different marginal rates and using these resources to fund other taxation changes. Given the complex policy and other issues involved in such a move, the Social Partners have agreed that the issue of standard rating and a tax credit system should be the subject of further examination before end-September, 1997.
Employee Share Schemes and Profit Sharing
3.15 - The Government and the Social Partners support more favourable tax treatment of employee share schemes and profit sharing as a means of deepening partnership and securing commitment to competitiveness at the level of the enterprise. They see these concepts being underpinned by appropriate tax adjustments to be included in the Finance Bill, 1997, following consultation with the Social Partners.
Business Tax Measures
3.16 - A further £100 million, on a full year cost basis, will be provided for a business tax package to include reductions in Corporation Tax. Subject to budgetary constraints, additional resources may be made available for Corporation Tax reductions in the light of decisions on the future strategic direction of policy on Corporation Tax for the next century. These will provide for progressive reductions in the standard rate of Corporation Tax and improvement in the position of small enterprise over the three years and consideration of agreed tax measures to facilitate accepted enterprise restructuring.
3.17 - The Government recognise that because the regime of 10 per cent Corporation Tax for manufacturing extends to 2010, and for the International Financial Services Centre (DFSC) to 2005, an early decision on the regime beyond those dates is necessary because of the planning horizons of firms.
Pensioners
3.18 - The Government agrees that, in order to assist the position of pensioners, it will, in each year of the Partnership, review the income tax allowance and exemption limits for those over 65 years with a view to further assisting the position of the aged.
Tax Administration
3.19 - Significant measures have been taken in recent years to promote voluntary compliance and to trace and counter tax evasion. As part of this, the new audit and enforcement programmes, which are specifically designed to combat tax evasion will be maintained. In addition, the co-operation between the Revenue Commissioners and the Department of Social Welfare in monitoring the operation of the tax and social welfare systems will continue through the joint investigation units. In the context of the ongoing efforts by the Revenue Commissioners to strike a reasonable balance between the need to ensure that all taxpayers fulfil their obligations on an equitable basis and the associated costs of compliance, submissions from the Social Partners on particular requirements which they consider give rise to excessive costs will be considered under the monitoring arrangement of Chapter 11. The Government are committed to continuing progress in this area to ensure the effective collection of revenues while being conscious of the need not to overburden compliant taxpayers.
VAT on Labour Intensive Services
3.20 - The Government confirms its intention, subject to EU requirements and overall budgetary circumstances, to maintain the status quo in relation to VAT for labour intensive services and construction over the medium term. Moreover, they will be pressing in the EU's review of the VAT regime for the option to maintain the current position of labour intensive services and construction in whatever common EU VAT system may emerge.
Tax and Social Welfare Fraud
3.21 - The Social Partners support the Government in its efforts to combat abuse in all areas of public expenditure. The greater use of RSI numbers will enable all agencies to co-operate more effectively in the pursuit of abuse.
3.22 - The Government are aware of, and will take further measures as appropriate to counter tax and social welfare fraud. The Black Economy Monitoring Group, which is drawn from the Revenue Commissioners, the Department of Social Welfare, the CIF, IBEC and ICTU, will continue its work of monitoring developments and reviewing the effectiveness of measures taken to combat tax and social welfare fraud. A number of important measures in relation to the operation of the C45 system have already been taken as a result of the work of the Group. The Social Partners note that there have also been changes in the law to permit or require a greater exchange of information by public bodies with the Revenue Commissioners and Social Welfare and that these initiatives should be built upon subject to the presumption of honesty. The views of the Group therefore will continue to be important in combating tax and social welfare fraud.
